Amara Holdings has been surging up in recent weeks on the basis of its being perceived as undervalued; half a year back it was 25 cents and a quarter back it was 30 cents; now it is more than double. It is riding the wave of property stock reratings running across Singapore right now.

Amara has undoubtedly being revalued due to the market recognising it as an asset play. The flagship properties are in Tanjong Pagar: the Amara Hotel et al. Let's take a look at the asset valuation.

We draw the three relevant assets out from the balance sheet:Development properties - S$115MInvestment properties - S$135MProperty,plant,equipment - S$146M

These three items form ~85% of the total assets and the properties under them are why Amara was rerated recently.

Development properties refers to the residential developments undertaken by Amara's property division, and comprises mainly (by GFA) a development at Upper Bukit Timah (The Linear). Profits from development properties take time to come on stream and have to be discounted as they only flow in over later years. The main development is not expected to outperform heavily and hence I leave things at that and move on to the next two items.

The Tanjong Pagar properties that are the centre of attention are classified under the latter two items.

Under Investment Properties, one sees the Amara Shopping Centre and the 12-storey Amara Corporate Tower (office building). Note that the properties are revalued tri-annually by an independent professional valuer and revaluation reserve updated accordingly on the balance sheet. The last one was by Chesterton in December 2005, on the basis of open market value, and my question is: how much would the above properties have appreciated since then, assuming that the Dec 05 valuation was accurate (should be lah!)? 20%, 30% maximum increase? That's about it, even with all the hulabaloo about the the IRs and the residential developments nearby (eg. the Icon, One Shenton). Based on 30% value appreciation in 2006 alone, it would add about 7 cents/share to book value.

According to Amara's accounting policies, investment properties that are substantially used for group corporate operations are classified under the line item "Property,plant,equipment", and under this lies the Amara Hotel. According to the latest annual report, Chesterton had also done a revaluation on the hotel in December 2005 and determined that there was a revaluation surplus of S$87M over the book value (which was last updated in the 1980s or 90s). The surplus for this item is not reflected on the books. Based on 576M outstanding shares, and factoring a generous 30% revaluation over 2006 due to the IR effect, it works out to a increase in book value of about 20 cents/share.

Amara's reported NTA is 25 cents per share. Its operations are about breaking even ex-extraordinary items, based on past track record, so all the value derives from assets. Add all the revaluation from above, based on generous rough estimate, and we have 25+7+20=52 cents/share revalued net assets per share. I of course ignore value appreciation in all other properties of which there are not many significant ones except probably the Shanghai mixed development. Nevertheless, the interest in this stock is due to its undervalued Singapore property exposure and so we leave things at that.

A recent broker report (BNP) estimates book surplus for Amara's properties at a $0.66/share surplus contribution to its NAV, which hence gives price target of 91 cents (NTA $0.25 + $0.66). That is the broker's estimate but the rough estimates I have done above does not indicate a bargain in any sense now. Remember, additionally, that these revalued assets are at least two steps away from cash conversion --- first a buyer has to be found, then payment has to be received from them. In this sense, asset backing is inferior to earnings as a source of value, because for the latter, it is only one step from cash conversion (revenue recognised, only receivables has to be converted to cash). A time discounting factor, equal to the cost of equity for the individual investor (say 15%), will be applied for every year the asset value is not realised. It is prudent to apply this discount, especially when Amara is not generating value from its operations per se.

An unlocking of value will also depend on the commitment of the controlling shareholders to create shareholder value. Just look at how the various members of the founding Teo family have been disposing of their shares on the open market since the share price started rallying in late 2006 ----- that does not give the minority investor much confidence, does it?

5 Comments:

u brought up the concept of discounting, which i fully agree, and i am pondering based on the concept of discounting, how would a company trade at a premium to RNAV, it is arguably possible, but not so convincing in my view

It would make sense if there is upside risk to the RNAV estimate. For example, I agree with the premiums over RNAV attached to Orchard Road-related property stocks. But for illiquid stocks with little value-add from their core earnings, perhaps one should be careful.

I would have preferred analysts to build in their upside assumptions into their RNAV computation rather than use one set of assumptions for its RNAV computation, then build in a premium to the RNAV.....